TRUPANION, INC. 10-Q

Item 1. Financial Statements TRUPANION, INC. Consolidated Statements of Operations (in thousands, except share data) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Revenue $ 130,120 $ 99,276 $ 359,341 $ 278,453 Cost of revenue: Veterinary invoice expense 91,266 69,086 252,955 196,301 Other cost of revenue 18,265 12,745 48,078 34,962 Gross profit 20,589 17,445 58,308 47,190 Operating expenses: Technology and development 3,383 2,271 9,217 7,518 General and administrative 6,121 5,017 17,737 15,655 Sales and marketing 13,344 9,255 33,028 26,239 Total operating expenses 22,848 16,543 59,982 49,412 Gain (loss) from investment in joint venture 2 ( 59 ) ( 84 ) ( 331 ) Operating (loss) income ( 2,257 ) 843 ( 1,758 ) ( 2,553 ) Interest expense 324 340 1,044 974 Other income, net ( 49 ) ( 297 ) ( 533 ) ( 1,094 ) (Loss) income before income taxes ( 2,532 ) 800 ( 2,269 ) ( 2,433 ) Income tax expense 26 18 69 12 Net (loss) income $ ( 2,558 ) $ 782 $ ( 2,338 ) $ ( 2,445 ) Net (loss) income per share: Basic $ ( 0.07 ) $ 0.02 $ ( 0.07 ) $ ( 0.07 ) Diluted $ ( 0.07 ) $ 0.02 $ ( 0.07 ) $ ( 0.07 ) Weighted average shares of common stock outstanding: Basic 35,426,742 34,876,782 35,193,317 34,593,345 Diluted 35,426,742 36,399,136 35,193,317 34,593,345 See accompanying notes to the consolidated financial statements. 1 TRUPANION, INC. Consolidated Statements of Comprehensive Income (Loss) (in thousands) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net (loss) income $ ( 2,558 ) $ 782 $ ( 2,338 ) $ ( 2,445 ) Other comprehensive income (loss): Foreign currency translation adjustments 199 ( 99 ) ( 141 ) 228 Net unrealized gain on available-for-sale debt securities — — 1 19 Other comprehensive income (loss), net of taxes 199 ( 99 ) ( 140 ) 247 Comprehensive (loss) income $ ( 2,359 ) $ 683 $ ( 2,478 ) $ ( 2,198 ) See accompanying notes to the consolidated financial statements. 2 TRUPANION, INC. Consolidated Balance Sheets (in thousands, except share data) September 30, 2020 December 31, 2019 Assets (unaudited) Current assets: Cash and cash equivalents $ 35,230 $ 29,168 Short-term investments 83,072 69,732 Accounts and other receivables 92,409 54,408 Prepaid expenses and other assets 7,344 5,513 Total current assets 218,055 158,821 Restricted cash 1,400 1,400 Long-term investments, at fair value 5,038 4,323 Property and equipment, net 71,114 70,372 Intangible assets, net 6,944 7,731 Other long-term assets 14,591 14,553 Total assets $ 317,142 $ 257,200 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 4,999 $ 4,087 Accrued liabilities and other current liabilities 19,057 13,798 Reserve for veterinary invoices 28,839 21,194 Deferred revenue 86,954 52,546 Total current liabilities 139,849 91,625 Long-term debt 29,839 26,086 Deferred tax liabilities 1,118 1,118 Other liabilities 2,038 1,611 Total liabilities 172,844 120,440 Stockholders’ equity: Common stock: $0.00001 par value per share, 100,000,000 shares authorized; 36,511,705 and 35,578,540 shares issued and outstanding at September 30, 2020; 35,876,882 and 34,947,017 shares issued and outstanding at December 31, 2019 — — Preferred stock: $0.00001 par value per share, 10,000,000 shares authorized; no shares issued and outstanding — — Additional paid-in capital 242,825 232,731 Accumulated other comprehensive income (loss) 110 250 Accumulated deficit ( 87,858 ) ( 85,520 ) Treasury stock, at cost: 933,165 shares at September 30, 2020 and 929,865 shares at December 31, 2019 ( 10,779 ) ( 10,701 ) Total stockholders’ equity 144,298 136,760 Total liabilities and stockholders’ equity $ 317,142 $ 257,200 See accompanying notes to the consolidated financial statements. 3 Trupanion, Inc. Consolidated Statements of Stockholders' Equity (in thousands, except share amounts) (unaudited) Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders' Equity Shares Amount Balance at July 1, 2020 35,246,292 $ — $ 238,077 $ ( 85,300 ) $ ( 89 ) $ ( 10,779 ) $ 141,909 Issuance of common stock in connection with the Company's equity award programs, net of tax withholdings 332,248 — 2,260 — — — 2,260 Stock-based compensation expense — — 2,488 — — — 2,488 Other comprehensive income (loss) — — — — 199 — 199 Net income (loss) — — — ( 2,558 ) — — ( 2,558 ) Balance at September 30, 2020 35,578,540 $ — $ 242,825 $ ( 87,858 ) $ 110 $ ( 10,779 ) $ 144,298 Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders' Equity Shares Amount Balance at July 1, 2019 34,782,324 $ — $ 229,069 $ ( 86,938 ) $ ( 407 ) $ ( 10,701 ) $ 131,023 Exercise of warrants, net — — — — — — — Issuance of common stock in connection with the Company's equity award programs, net of tax withholdings 153,498 — ( 753 ) — — — ( 753 ) Stock-based compensation expense — — 1,893 — — — 1,893 Other comprehensive income (loss) — — — — ( 99 ) — ( 99 ) Net income (loss) — — — 782 — — 782 Balance at September 30, 2019 34,935,822 $ — $ 230,209 $ ( 86,156 ) $ ( 506 ) $ ( 10,701 ) $ 132,846 See accompanying notes to the consolidated financial statements. 4 Trupanion, Inc. Consolidated Statements of Stockholders' Equity (Continued) (in thousands, except share amounts) (unaudited) Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders' Equity Shares Amount Balance at January 1, 2020 34,947,017 $ — $ 232,731 $ ( 85,520 ) $ 250 $ ( 10,701 ) $ 136,760 Issuance of common stock in connection with the Company's equity award programs, net of tax withholdings 634,823 — 3,606 — — — 3,606 Stock-based compensation expense — — 6,488 — — — 6,488 Repurchase of common stock ( 3,300 ) — — — — ( 78 ) ( 78 ) Other comprehensive income (loss) — — — — ( 140 ) — ( 140 ) Net income (loss) — — — ( 2,338 ) — — ( 2,338 ) Balance at September 30, 2020 35,578,540 $ — $ 242,825 $ ( 87,858 ) $ 110 $ ( 10,779 ) $ 144,298 Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders' Equity Shares Amount Balance at January 1, 2019 34,025,136 $ — $ 219,838 $ ( 83,711 ) $ ( 753 ) $ ( 6,201 ) $ 129,173 Exercise of warrants, net 306,120 — 4,800 — — ( 4,500 ) 300 Issuance of common stock in connection with the Company's equity award programs, net of tax withholdings 604,566 — 339 — — — 339 Stock-based compensation expense — — 5,232 — — — 5,232 Other comprehensive income (loss) — — — — 247 — 247 Net income (loss) — — — ( 2,445 ) — — ( 2,445 ) Balance at September 30, 2019 34,935,822 $ — $ 230,209 $ ( 86,156 ) $ ( 506 ) $ ( 10,701 ) $ 132,846 See accompanying notes to the consolidated financial statements. 5 TRUPANION, INC. Consolidated Statements of Cash Flows (in thousands) (unaudited) Nine Months Ended September 30, 2020 2019 Operating activities Net loss $ ( 2,338 ) $ ( 2,445 ) Adjustments to reconcile net loss to cash provided by operating activities: Depreciation and amortization 4,770 4,358 Stock-based compensation expense 6,310 5,075 Other, net 118 143 Changes in operating assets and liabilities: Accounts and other receivables ( 38,068 ) ( 18,582 ) Prepaid expenses and other assets ( 1,979 ) 275 Accounts payable, accrued liabilities, and other liabilities 6,602 2,806 Reserve for veterinary invoices 7,692 3,187 Deferred revenue 34,473 16,808 Net cash provided by operating activities 17,580 11,625 Investing activities Purchases of investment securities ( 43,972 ) ( 45,492 ) Maturities of investment securities 29,817 28,224 Purchases of property, equipment and intangible assets ( 4,512 ) ( 3,586 ) Other 88 ( 1,937 ) Net cash used in investing activities ( 18,579 ) ( 22,791 ) Financing activities Proceeds from exercise of stock options 4,296 2,255 Shares withheld to satisfy tax withholding ( 656 ) ( 1,610 ) Borrowings from line of credit, net of financing fees 6,213 9,167 Repayments to line of credit ( 2,500 ) — Other ( 78 ) ( 438 ) Net cash provided by financing activities 7,275 9,374 Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash, net ( 214 ) 267 Net change in cash, cash equivalents, and restricted cash 6,062 ( 1,525 ) Cash, cash equivalents, and restricted cash at beginning of period 30,568 27,952 Cash, cash equivalents, and restricted cash at end of period $ 36,630 $ 26,427 Supplemental disclosures Noncash investing and financing activities: Issuance of common stock for cashless exercise of warrants $ — $ 4,500 Purchases of property and equipment included in accounts payable and accrued liabilities $ 613 $ 214 See accompanying notes to the consolidated financial statements. 6 TRUPANION, INC. Notes to the Consolidated Financial Statements (unaudited) 1. Nature of Operations and Significant Accounting Policies Description of Business and Basis of Presentation Trupanion, Inc. (collectively with its wholly-owned subsidiaries, the Company) provides medical insurance for cats and dogs throughout the United States, Canada and Puerto Rico. The financial data as of December 31, 2019 was derived from the Company's audited consolidated financial statements. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and, in management's opinion, have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the Company's financial position, results of operations, comprehensive income (loss), stockholders' equity and cash flows for the interim periods. These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (SEC) on February 13, 2020 (the 2019 10-K). The Company's accounting policies are described in Note 1 to the audited financial statements included in the 2019 10-K. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the full fiscal year or any other interim period. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from such estimates. See Note 1 to the audited financial statements included in the 2019 10-K for additional discussion of these estimates and assumptions. Recently Adopted Accounting Pronouncements The Company adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326), using the modified retrospective approach on January 1, 2020. The ASU replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. The new standard did not have a material impact on the Company's consolidated statements of operations, balance sheets, stockholders' equity, or cash flows. The Company did not record any cumulative-effect adjustment to its retained earnings upon the adoption. 7 2. Net Income (Loss) per Share Basic net income (loss) per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is calculated using the weighted average number of shares of common stock plus, when dilutive, potential shares of common stock outstanding using the treasury-stock method. Potential shares of common stock outstanding include stock options, unvested restricted stock awards and restricted stock units, and warrants. The components of basic and diluted earnings per share were as follows (in thousands except share and per share information): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Basic earnings per share: Net (loss) income $ ( 2,558 ) $ 782 $ ( 2,338 ) $ ( 2,445 ) Shares used in computation: Weighted average shares of common stock outstanding 35,426,742 34,876,782 35,193,317 34,593,345 Basic earnings per share $ ( 0.07 ) $ 0.02 $ ( 0.07 ) $ ( 0.07 ) Diluted earnings per share: Net (loss) income $ ( 2,558 ) $ 782 $ ( 2,338 ) $ ( 2,445 ) Shares used in computation: Weighted average shares of common stock outstanding 35,426,742 34,876,782 35,193,317 34,593,345 Stock options — 1,457,486 — — Restricted stock awards and units — 64,868 — — Weighted average shares of diluted common stock outstanding 35,426,742 36,399,136 35,193,317 34,593,345 Diluted earnings per share $ ( 0.07 ) $ 0.02 $ ( 0.07 ) $ ( 0.07 ) The following potentially dilutive equity securities were not included in the diluted earnings per share of common stock calculation because they would have had an antidilutive effect: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Stock options 1,647,052 2,000 1,647,052 2,199,213 Restricted stock awards and restricted stock units 765,825 43,114 765,825 605,568 3. Investments Long-term investments are classified as available-for-sale and reported at fair value with unrealized gains and losses included in accumulated other comprehensive income (loss). Short-term investments are classified as held-to-maturity and reported at amortized cost. The amortized cost, gross unrealized holding gains and losses, and estimates of fair value of long-term and short-term investments by major security type and class of security were as follows as of September 30, 2020 and December 31, 2019 (in thousands): 8 Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Fair Value As of September 30, 2020 Long-term investments: Foreign deposits $ 4,037 $ — $ — $ 4,037 Municipal bond 1,000 1 — 1,001 $ 5,037 $ 1 $ — $ 5,038 Short-term investments: U.S. Treasury securities $ 6,476 $ — $ ( 1 ) $ 6,475 Certificates of deposit 1,634 — — 1,634 U.S. government funds 74,962 — — 74,962 $ 83,072 $ — $ ( 1 ) $ 83,071 Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Fair Value As of December 31, 2019 Long-term investments: Foreign deposits $ 3,323 $ — $ — $ 3,323 Municipal bond 1,000 — — 1,000 $ 4,323 $ — $ — $ 4,323 Short-term investments: U.S. Treasury securities $ 6,156 $ — $ ( 1 ) $ 6,155 Certificates of deposit 440 — — 440 U.S. government funds 63,136 — — 63,136 $ 69,732 $ — $ ( 1 ) $ 69,731 Maturities of debt securities classified as available-for-sale were as follows (in thousands): As of September 30, 2020 Amortized Cost Fair Value Available-for-sale: Due after one year through five years $ 5,037 $ 5,038 $ 5,037 $ 5,038 The Company does not expect any credit losses from its held-to-maturity investments, considering the composition of the investment portfolio and the credit loss history of these investments. For available-for-sale debt securities, the Company determined that the unrealized losses were immaterial and due to non-credit factors. The Company does not intend to sell, nor is it more likely than not that the Company will be required to sell, the securities prior to maturity or prior to the recovery of the amortized cost basis. 4. Other Investments Investment in Variable Interest Entity In July 2018, the Company purchased $ 3.0 million in preferred stock of a privately held corporation with a complementary business line. In October 2019, the Company purchased an additional $ 4.0 million in preferred stock upon the exercise of an option by the variable interest entity. The Company does not have power over the activities that most significantly impact the economic performance of the variable interest entity and is, therefore, not the primary beneficiary. The Company has the option to purchase all of the outstanding common shares issued by the variable interest entity on the fifth anniversary of the initial preferred stock purchase. 9 Additionally, the Company has extended a $ 2.5 million revolving line of credit to the variable interest entity to fund its inventory purchases. The Company's investment and amounts loaned under the line of credit are recorded in other long-term assets on its consolidated balance sheet. The outstanding loan balance under the line of credit was $ 2.5 million as of September 30, 2020 and December 31, 2019. The Company has also entered into a series of agreements to provide ancillary services to the variable interest entity at cost. The Company provided $ 1.0 million of these services for both of the nine months ended September 30, 2020 and 2019, respectively, which were recorded against its operating expenses. Investment in Joint Venture In September 2018, the Company acquired a non-controlling equity interest in a joint venture, whereby it has committed to licensing certain intellectual property and contributing up to $ 2.2 million AUD upon the achievement of specific operational milestones over a period of at least four years from the agreement execution date. As of September 30, 2020, the Company has contributed $ 0.5 million AUD. This equity investment is accounted for using the equity method and is classified in other long-term assets on the Company's consolidated balance sheet. The Company's share of income and losses from this equity method investment is included in gain (loss) from investment in joint venture on its consolidated statement of operations. Also included in this line item are income and expenses associated with administrative services provided to the joint venture. 5. Fair Value Investments The following table summarizes, by major security type, the Company's assets that are measured at fair value on a recurring basis, and placement within the fair value hierarchy (in thousands): As of September 30, 2020 Fair Value Level 1 Level 2 Level 3 Assets Restricted cash $ 1,400 $ 1,400 $ — $ — Money market funds 1,053 1,053 — — Fixed maturities: Foreign deposits 4,037 4,037 — — Municipal bond 1,001 — 1,001 — Investment in variable interest entity 7,625 — — 7,625 Total $ 15,116 $ 6,490 $ 1,001 $ 7,625 As of December 31, 2019 Fair Value Level 1 Level 2 Level 3 Assets Restricted cash $ 1,400 $ 1,400 $ — $ — Money market funds 1,050 1,050 — — Fixed maturities: Foreign deposits 3,323 3,323 — — Municipal bond 1,000 — 1,000 — Investment in variable interest entity 7,625 — — 7,625 Total $ 14,398 $ 5,773 $ 1,000 $ 7,625 The Company measures the fair value of restricted cash, money market funds, and foreign deposits based on quoted prices in active markets for identical assets. The fair value of the municipal bond is based on either recent trades in inactive markets or quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data. Short-term investments are carried at amortized cost, and the fair value and changes in unrealized gains (losses) are disclosed in Note 3, Investments. The fair value of these investments is determined in the same manner as for available-for-sale securities and is considered a Level 1 measurement. 10 The Company's preferred stock investment in the variable interest entity (see Note 4) is accounted for as an available-for-sale debt security and measured at fair value at each balance sheet date. The estimated fair value of the preferred stock investment is a Level 3 measurement and is based on certain unobservable inputs such as the value of the underlying enterprise, volatility, time to liquidity, and market interest rates. An increase or decrease in any of these unobservable inputs would result in a change in the fair value measurement. Estimated fair value was $ 7.6 million as of September 30, 2020, unchanged from December 31, 2019, recorded in other long-term assets on the Company's consolidated balance sheet. An unrealized gain of $ 0.6 million was recorded in other comprehensive income in the quarter ended December 31, 2019. Fair Value Disclosures The Company's other long-term assets balance included notes receivable of $ 5.9 million as of September 30, 2020 and $ 6.1 million as of December 31, 2019, recorded at their estimated collectible amount. The Company estimates that the carrying value of the notes receivable approximates the fair value. The estimated fair value represents a Level 3 measurement within the fair value hierarchy and is based on market interest rates and the assessed creditworthiness of the third party. There was no significant activity in Level 3 of the hierarchy during the nine months ended September 30, 2020. The Company estimates the fair value of long-term debt based upon rates currently available to the Company for debt with similar terms and remaining maturities. This is a Level 3 measurement. Based upon the terms of the debt, the carrying amount of long-term debt approximated fair value at September 30, 2020 and December 31, 2019. The Company recognizes transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. There were no transfers between levels for the nine months ended September 30, 2020 and the year ended December 31, 2019. 6. Debt The Company has a revolving line of credit of up to $ 50.0 million, maturing June 2022. The facility is secured by any and all interests in the Company's assets that are not otherwise restricted. Interest on the revolving line of credit is payable monthly at the greater of 4.5%, or 0.75% plus the prime rate ( 4.50 % at September 30, 2020). The credit agreement includes other ancillary services and letters of credit of up to $ 4.5 million. It also requires a deposit of restricted cash of $ 1.4 million and a minimum cash or investment balance of $ 2.1 million. The credit agreement requires the Company to comply with various financial and non-financial covenants. As of September 30, 2020, the Company was in compliance with all financial and non-financial covenants required by the credit agreement. Borrowings on the revolving line of credit are limited to the lesser of $ 50.0 million or the total amount of cash and securities held by the Company's insurance subsidiaries (American Pet Insurance Company and Wyndham Insurance Company (SAC) Limited Segregated Account AX). As of September 30, 2020, available borrowing capacity on the line of credit was $ 19.9 million, with an outstanding balance of $ 0.2 million for ancillary services and letters of credit, and borrowings under the facility of $ 30.0 million, recorded net of financing fees of $ 0.1 million. 7. Commitments and Contingencies Certain state insurance regulators in the United States have contacted the Company regarding whether employees who had helped prospective members enroll by telephone in prior years were required to have an insurance license to conduct such telephone conversations. To date, the Company has resolved each of these matters in non-material amounts and believes it is compliant with the applicable regulations. The Company is currently engaged with a limited number of state insurance regulators to resolve this same legacy issue and believes it has adequately reserved for these matters. In addition, from time to time the Company is or may become subject to various legal proceedings arising in the ordinary course of business, including proceedings against members, other entities or regulatory bodies. Estimated liabilities are recorded when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. At this time, the Company does not believe any such matters to be material individually or in the aggregate. These views are subject to change following the outcome of future events or the results of future developments. 11 8. Reserve for Veterinary Invoices The reserve for veterinary invoices is an estimate of the future amount the Company will pay for veterinary invoices that are dated as of, or prior to, its balance sheet date. The reserve also includes the Company's estimate of related internal processing costs. The reserve estimate involves actuarial projections, and is based on management's assessment of facts and circumstances currently known, and assumptions about anticipated patterns. The Company uses generally accepted actuarial methodologies, such as paid loss development methods, in estimating the amount of the reserve for veterinary invoices. The reserve is made for each of the Company's segments, subscription and other business, and is continually refined as the Company receives and pays veterinary invoices. Changes in management's assumptions and estimates may have a relatively large impact to the reserve and associated expense. Reserve for veterinary invoices Summarized below are the changes in the total liability for the Company's subscription business segment (in thousands): Nine Months Ended September 30, Subscription 2020 2019 Reserve at beginning of year $ 15,541 $ 13,875 Veterinary invoices during the period related to: Current year 202,734 169,234 Prior years 356 560 Total veterinary invoice expense 203,090 169,794 Amounts paid during the period related to: Current year 185,828 155,129 Prior years 12,849 11,985 Total paid 198,677 167,114 Non-cash expenses 903 514 Reserve at end of period $ 19,051 $ 16,041 The Company's reserve for the subscription business segment increased from $ 15.5 million at December 31, 2019 to $ 19.1 million at September 30, 2020. This change was comprised of $ 203.1 million in expense recorded during the period less $ 198.7 million in payments of veterinary invoices. The $ 203.1 million in veterinary invoice expense incurred included an adjustment of $ 0.4 million to the reserves relating to prior years, which was the result of ongoing analysis of recent payment trends. For the nine months ended September 30, 2019, the Company increased prior year reserves by $ 0.6 million as a result of analysis of payment trends. Summarized below are the changes in total liability for the Company's other business segment (in thousands): Nine Months Ended September 30, Other Business 2020 2019 Reserve at beginning of year $ 5,653 $ 2,187 Veterinary invoices during the period related to: Current year 50,062 26,821 Prior years ( 197 ) ( 314 ) Total veterinary invoice expense 49,865 26,507 Amounts paid during the period related to: Current year 40,406 23,671 Prior years 5,324 1,765 Total paid 45,730 25,436 Non-cash expenses — — Reserve at end of period $ 9,788 $ 3,258 12 The Company’s reserve for the other business segment increased from $ 5.7 million at December 31, 2019 to $ 9.8 million at September 30, 2020. This change was comprised of $ 49.9 million in expense recorded during the period less $ 45.7 million in payments of veterinary invoices. The $ 49.9 million in veterinary invoice expense incurred included a reduction of $ 0.2 million to the reserves relating to prior years, which was the result of ongoing analysis of recent payment trends. For the nine months ended September 30, 2019, the Company decreased prior year reserves by $ 0.3 million as a result of analysis of payment trends. Reserve for veterinary invoices, by year of occurrence In the following tables, the reserve for veterinary invoices for each segment is presented as the amount (in thousands) by the year to which the veterinary invoice relates, referred to as the year of occurrence. Subscription As of September 30, 2020 Year of Occurrence 2018 and prior $ 769 2019 2,280 2020 16,002 $ 19,051 Other Business As of September 30, 2020 Year of Occurrence 2018 and prior $ 45 2019 88 2020 9,655 $ 9,788 9. Stock-Based Compensation Stock-based compensation expense includes stock options, restricted stock awards, and restricted stock units granted to employees and other service providers and has been reported in the Company’s consolidated statements of operations depending on the function performed by the employee or other service provider. Stock-based compensation expense recognized in the consolidated statements of operations was as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Veterinary invoice expense $ 337 $ 169 $ 760 $ 515 Other cost of revenue 111 89 300 268 Technology and development 133 94 366 267 General and administrative 1,108 916 2,912 2,452 Sales and marketing 741 577 1,972 1,573 Total stock-based compensation expense 2,430 1,845 6,310 5,075 Capitalized stock-based compensation 58 48 178 157 Total stock-based compensation $ 2,488 $ 1,893 $ 6,488 $ 5,232 As of September 30, 2020, the Company had 66,956 unvested stock options and 765,825 unvested restricted stock awards and restricted stock units that are expected to vest. Stock-based compensation expenses of $ 0.4 million related to unvested stock options and $ 20.2 million related to unvested restricted stock awards and restricted stock units are expected to be recognized over a weighted average period of approximately 0.6 years and 2.9 years, respectively. 13 Stock Options A summary of the Company's stock option activity is as follows: Number of Options Weighted Average Exercise Price per Share Aggregate Intrinsic Value (in thousands) Outstanding as of December 31, 2019 2,097,978 $ 9.86 $ 57,907 Granted — — — Exercised ( 438,981 ) 9.71 20,132 Forfeited ( 11,945 ) 17.40 — Outstanding as of September 30, 2020 1,647,052 9.84 113,740 Exercisable as of September 30, 2020 1,580,096 9.49 109,670 As of September 30, 2020, stock options outstanding and stock options exercisable had a weighted average remaining contractual life of 4.3 years and 4.2 years, respectively. Restricted Stock Awards and Restricted Stock Units A summary of the Company’s restricted stock award and restricted stock unit activity is as follows: Number of Shares Weighted Average Grant Date Fair Value per Share Unvested shares as of December 31, 2019 581,943 $ 29.56 Granted 457,553 28.53 Vested ( 213,495 ) 29.41 Forfeited ( 60,176 ) 30.43 Unvested shares as of September 30, 2020 765,825 28.91 10. Leases The Company leases certain office space and equipment from third parties and recognizes lease expense on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on its consolidated balance sheets. The Company also leases a portion of its building to third parties and records related rental income within general and administrative expense in the consolidated statements of operations. These leases have remaining initial lease terms of 2 years to 8 years, some of which give the tenants options to renew the leases for up to an additional 10 years, and options to terminate the leases after 3 years of the initial lease terms, with early termination fees required. The Company recorded rental income of $ 0.4 million and $ 1.5 million for the three and nine months ended September 30, 2020. 11. Stockholders' Equity Common Stock and Preferred Stock As of September 30, 2020, the Company had 100,000,000 shares of common stock authorized and 35,578,540 shares of common stock outstanding. Holders of common stock are entitled to one vote on each matter properly submitted to the stockholders of the Company except those related to matters concerning possible outstanding preferred stock. At September 30, 2020, the Company had 10,000,000 shares of undesignated preferred stock authorized for future issuance and did not have any outstanding shares of preferred stock. The holders of common stock are also entitled to receive dividends as and when declared by the board of directors of the Company, whenever funds are legally available. These rights are subordinate to the dividend rights of holders of any senior classes of stock outstanding at the time. The Company is unable to pay dividends to stockholders as of September 30, 2020 due to restrictions in its credit agreements. 14 Share Repurchase Program In November 2019, the Company's board of directors approved a share repurchase program, pursuant to which the Company may repurchase up to $ 15.0 million of its outstanding shares over the twelve-month period following the approval. The Company repurchased 3,300 shares during the nine months ended September 30, 2020. The Company did not repurchase any shares during the three months ended September 30, 2020 or the year ended December 31, 2019. 12. Segments The Company has two segments: subscription business and other business. The subscription business segment includes revenue and expenses related to monthly pet insurance subscriptions marketed directly to consumers, while the other business segment includes all other business that is not directly marketed to consumers. The chief operating decision maker reviews revenue, gross profit, and operating income (loss) to evaluate segment performance. Revenue, veterinary invoice expense, other cost of revenue, and sales and marketing expenses are generally directly attributed to each segment. Other operating expenses, such as technology and development expense and general and administrative expense, are allocated proportionately based on revenue in each segment. Interest and other expenses and income taxes are not allocated to the segments, nor included in the measure of segment profit or loss. The Company does not analyze discrete segment balance sheet information related to long-term assets. Operating income (loss) of the Company’s segments were as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Subscription business: Revenue $ 99,379 $ 82,613 $ 281,316 $ 234,571 Veterinary invoice expense 71,872 58,995 203,090 169,794 Other cost of revenue 9,226 7,775 26,024 21,627 Gross profit 18,281 15,843 52,202 43,150 Technology and development 2,584 1,890 7,214 6,342 General and administrative 4,675 4,175 13,893 13,199 Sales and marketing 13,079 9,161 32,409 25,977 Subscription business operating income (loss) ( 2,057 ) 617 ( 1,314 ) ( 2,368 ) Other business: Revenue 30,741 16,663 78,025 43,882 Veterinary invoice expense 19,394 10,091 49,865 26,507 Other cost of revenue 9,039 4,970 22,054 13,335 Gross profit 2,308 1,602 6,106 4,040 Technology and development 799 381 2,003 1,176 General and administrative 1,446 842 3,844 2,456 Sales and marketing 265 94 619 262 Other business operating income (loss) ( 202 ) 285 ( 360 ) 146 Gain (loss) from investment in joint venture 2 ( 59 ) ( 84 ) ( 331 ) Total operating income (loss) $ ( 2,257 ) $ 843 $ ( 1,758 ) $ ( 2,553 ) 15 The following table presents the Company’s revenue by geographic region of the member (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 United States $ 109,119 $ 81,890 $ 300,699 $ 228,977 Canada 21,001 17,386 58,642 49,476 Total revenue $ 130,120 $ 99,276 $ 359,341 $ 278,453 Substantially all of the Company’s long-lived assets were located in the United States as of September 30, 2020 and December 31, 2019. 13. Related Parties In August 2018, the Company invested $ 0.3 million in a limited liability entity in exchange for a 17.5 % ownership interest. The investee is considered to be a related party, as the Company has the ability to exercise significant influence over the investee. In February 2020, the Company entered into a service agreement with the investee, under which the Company incurred $ 0.6 million and $ 1.7 million of expenses for consulting services provided by the investee during the three and nine months ended September 30, 2020, respectively. 14. Subsequent Events On October 26, 2020, the Company entered into a Strategic Alliance Agreement, Shareholder Agreement, and a Stock Purchase Agreement with Aflac Incorporated (“Aflac”). The Strategic Alliance Agreement sets forth the structure for a distribution alliance between the parties (the “Alliance”). This includes responsibilities of Aflac relating to brand, access and distribution, responsibilities of the Company relating to marketing, product development and middle and back office functions, the intended go-to-market approach, the economic assumptions, and the intending timing. The parties have agreed to negotiate in good faith and to act reasonably with each other in order to agree on such terms as are necessary to fully implement the Alliance. To drive long term alignment, Aflac committed to invest $ 200.0 million cash in exchange for 3,636,364 newly issued shares of the Company's common stock at a price of $ 55 per share, subject to a minimum holding period of three years. The initial investment of $ 60.0 million closed on October 26, 2020. The remaining $ 140.0 million is subject to regulatory approvals and is expected to close by the end of 2020. On October 30, 2020, the Company completed an acquisition of an unaffiliated software company and also completed an asset acquisition for a total purchase price of approximately $ 48.2 million. The acquired technology in both transactions focuses on the pet space and, along with the acquired personnel, is intended to enable the Company to improve its back-end software to help facilitate growth opportunities, additional products and geographies, as well as enhance its mobile platform. The initial accounting of these acquisitions has not been completed at the time this Quarterly Report on Form 10-Q is issued. 16